Low Natural Gas Prices Fuel The US LNG Bull Run
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It is the legally mandated purpose of a for-profit corporation to make money for its owners and to prioritize that goal above all else. So, it is no surprise that U.S. natural gas producers have been seeking relief from domestic prices that have generally hovered between $2 and $4 per thousand cubic feet for most of this decade.
Qatar Petroleum and Exxon Mobil Corp announced last week that they would be adding to investment in Texas in liquefied natural gas capacity for export from the United States, a move that was described as a response to the immense volumes of gas coming from American shale deposits. With so many LNG projects being built and on the drawing board, will anything slow down the U.S. LNG juggernaut?
The fight over U.S. exports of natural gas is long since over. U.S. producers now have the right—like almost all other U.S. producers of commodities or manufactured products—to sell their products to the highest bidder wherever that bidder may be in the world.
U.S.-based industrial consumers of natural gas howled a bit when the federal government lifted restrictions on natural gas exports. But since then, gas prices have maintained their ground-hugging trajectory.
This is in part because gas associated with the production of oil produced from similar shale deposits has continued to flood the U.S. market. But with the price of oil slumping and a reduction in the pace of drilling expected, that associated gas may not be so plentiful.
The irony is that falling oil prices may ultimately lead to a spike in U.S. natural gas prices. But if the pure natural gas shale plays are so productive, how can this be? The answer is quite simply that they aren’t. And, that is the secret behind the next bull market in U.S. natural gas. It likely won’t come as a result of demand for U.S. LNG so much as a surprise shortage of domestic gas.
A detailed 2018 analysis of U.S. shale gas plays summarizes the problem this way:
The Appalachian plays are the main driver for shale gas production growth – the Marcellus and Utica now account for 48% of U.S. shale gas production. EIA [U.S. Energy Information Administration] forecasts for the Marcellus and Utica, which project these will provide 52% of cumulative production of U.S. shale gas through 2050, are rated as extremely optimistic.
Production in older shale gas plays—including the Barnett, Haynesville, and Fayetteville, which were among the first to be developed—is now down more than 40% from peak. EIA projections for these plays—along with the Woodford, which is down 25% from peak—are rated as highly to extremely optimistic.
So, it turns out that just two of the six big shale gas plays in the United States are not yet past their peak production. It’s a puzzle how this translates into abundance in the long run for America. For context, for 2018 through November (the latest month for which statistics are available) total net natural gas exports amounted to 588 billion cubic feet. That’s a tiny fraction of the 29.8 trillion cubic feet of U.S. marketed production during the same period. The great American export boom seems to be a ways in the future if it ever materializes. We’re still using almost all of what we produce at home.
But then, that’s not the point. Through LNG export facilities, U.S. producers will be linked to demand in the higher-priced world market which will compete with domestic users for supply. That should in theory buoy the domestic price and enrich producers.
I am not sanguine, however, about the financial prospects of U.S. LNG export projects as I think they will end being less attractive when U.S. prices rise and make them less competitive.
The ones that have locked in long-term contracts linked to a benchmark such as the Henry Hub price may do well as they are guaranteed a profit no matter what the U.S. natural gas price is (unless buyers renege on their contracts). Increasingly, however, LNG buyers are opting for more spot cargoes and less contractual LNG which may pose a problem for U.S. LNG facilities with a substantial amount of spot LNG exposure when American prices spike.
It may be quite a while before domestic U.S. natural gas prices zoom upward, especially if the economy goes into recession in the next year or two. A drop in demand due to a soft economy would delay the next bull market in domestic natural gas for quite some time. But unless some huge new as yet undiscovered U.S. sources of natural gas appear, that bull market will arrive.
Such a bull run—especially if it lasts for years—would have a hidden beneficiary: renewable energy. Renewable energy deployment in the United States has been muted somewhat by low natural gas prices which have caused electric utilities to expand their natural-gas fired fleet of generating plants. When the bull run comes, however, those utilities will likely rue the day they invested so much in baseload natural gas plants even as the renewable energy industry is dancing in the streets at their newfound competitiveness.
Note: This article was contributed to EconMatters.com, courtesy of Kurt Cobb, author of Prelude, a peak oil-themed novel, and founder at Resource Insights.
The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.
Category: Natural Gas
